The Relationship between Executive Compensation and Corporate Performance - Dissertation Example

The Relationship between Executive Compensation and Corporate Performance

The purpose of this paper is to assess the impact of executive pay on the performance of companies available within the Compustat universe and the Amsterdam Midcap index and Amsterdam exchange index. The study contemplates the correlation between the degree of CEO pay for some of the top companies and also addresses some of the determinants of corporate performance. Regression analysis was used to determine the correlation between pay and performance. The purpose of the regression is to make a comparison between some of the components of executive pay and the determinants of corporate performance. The first regression analysis was done on a large sample of companies available at the Compustat database. The second regression analysis on a smaller sample of companies available Amsterdam Midkap and Amsterdam Indexes. The results of the regression analysis from both large samples and small samples indicate that there is no major relationship between the two variables. The insignificant relationship implies that huge executive remuneration should be stopped to improve the returns of the shareholders. It is also right to say that the ratios of performance should not be considered as the main determinants of CEO pay. Therefore, it is vital to inform the CEOs that they should consider remuneration that is reasonable enough to improve the financial performance of their companies since they have a direct connection to the growth shareholder’s wealth. This study majorly relies on literature review, sample analysis and agency theory, and the BSM model. 

Executive compensations are the financial reward and payments that are given to managers who run a company. These compensations or payments consist of shares, bonuses, and salaries that are acquired from the company’s profits and stock. Some of the things that are often put into consideration while compensating executives include tax law, government laws, and also the company’s desires. Executive compensation is vital when it comes to the evaluation of investment prospects. Executives who do not get paid well have little chance of giving out their best when it comes to performance.